World Bank Reprint Series: Number 281

Bela Balassa

Trade Policy in Mexico

Reprinted with permission from World Development, vol. 11, no. 9 (1983), pp. 795-811.

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Trade Policy in Mexico

BELA BALASSA*Johizs Hopkins University, Baltimore, Marfland

Summary. - This paper provides an evaluation of the trade policies applied in Mexico in thelast quarter century (1956-1982). It examines the policies in thrce well-defined periods: (1)1956-1971, considered to be a period of relative stability following the rapid inflation anddevaluations of tlhe first post-war decade, thouglh ehlaracterized by increasing overvaluation oftlhe peso; (2) March 1972-December 1976, beginning with the acceleration of governmentspending under President Echeverria and ending witlh the devaluations of thc peso; (3) December1976-Deceniber 1982, covering the Presidency of José López Portillo. For caclh period, theautlhor discusses macroeconomic policy, trade policy developments and changes in Mexicanexports and imports and tlhcir contribution to industrial growth. Ilaving demnonstrated thc inter-depenidence of macrocconoinic and trade policies, the paper concludes with recominendationsfor policy reform, e.g. for remedying macroeconomic disequilibria, reducing price distortionsand reforming trade policy, with a view to moving towards an outward-riented developmentstrategy in Mexico.

1. INTRODUCTION and imports and their contribution to industrialgrowth are discussed.

This paper provides an evaluation of the tradepolicies applied in Mexico during the last quartercentury and makes recommendations for the 2. THE PERIOD OF 'STABILIZINGfuture. It follows the author's advisory reports DEVELOPMENT' (1956-- 1971)for the government of Mexico, which proposedintroducing an export subsidy scheme (Balassa, (a) Macroeconromic background1970) and reforming foreign trade and industrialpolicies (Balassa, 1977), as well as his appraisal In the first decade following the Secondof the policies of the 1973-1978 period and World War, prices rose rapidly in Mexico,recommendations for modifying these policies giving rise to an inflation-devaluation cycle.(Balassa, 1980). With successive devaluations, the peso-dollar

The paper will examine the policies applied exchange rate more than doubled, fromr 4.85in three well-defined periods. The first period, in 1945 to 12.50 in September 1954; it wasfrom 1956 to 1971, is considered to be one of maintained at that level until September 1976.relative stability following the rapid inflation Antonio Ortiz Mena, Secretary of Treasuryand devaluations of the first postwar decade, from 1958 to 1970, called the decade followingalthough it was characterized by the increasingovervaluation of the peso. The second periodstarts with the acceleration of government * Tlhe atutlhor is Professor of Political Econoniy at thespending in March 1972 under President Johns Hlopkins University and Consultant at the WorldEcheverria and ends with the devaluations of Bank. 1-le has greatly benefited from discussions un theSeptember---December 1976. The third period subjcct with Mcxican policy makers and cconomists.covers the Presidency of José López Portillo The autlhor alone is responsible, however, for the(December 1976-December 1982). contents of tlhe paper and should not be assumed to

The discussion of each of the three periods reflect the views of the World Bank.begins with a description of the macroeconomic Unless otherwise noted, tlie data originate in

backroud tlat s ncessry or ndertaning official Mexican statistical suoLrces. Researchi assistancebackground that is necessary for understanding by Keiinetlh Meyers is grateftlly acknowledged.changes in Mexico's trade policy. It is followed This paper was first presented at the Conference onby an analysis of trade policy developments, 'Industrialización y Comercio l.\terior'. organized bywith further attention given to industrial policy the Colegio Nacional de Economistas and held inmeasures. Finally, changes in Mexican exports Mexico City, 3 January 1983.

795

796 WORLD DEVELOPMENT

the establishment of the new exchange parity a increases in the debt service ratio (the ratio ofperiod of 'Stabilizing Development' in MexicQ debt service charges to the value of merchandise(1969). This designation is appropriate to the exports) that reached 5 8% in 1971.extent that the rate of inflation declined from The increase in the ratio of the currentthe preceding decade. Nevertheless, it continued account deficit to GDP was concentrated in theto exceed inflation rates in the United States, first several years of the period, when much ofMexico's principal trading partner, that accounts the deterioration of Mexico's competitivefor two-thirds of its merchandise exports and position occurred; the real value of the pesoimports. The US share reaches nine-tenths for appreciated by 10% between 1956 and 1960. Inservice transactions and it is nearly 100%0 for turn, the ratio of the merchandise trade deficitborder trade. to the gross domestic product increased from

Gerardo Bueno calculated real exchange 2.8%o of GNP in 1956 to 3.2% in 1960,rates for the peso vis-d-vis the US dollar by subsequently declining to 2.5% in 1971. Thesetaking 1956 as the base year, on the grounds changes occurred as export and import sharesthat this year represented an approximate declined at different rates, in response to theequilibrium position in Mexico's balance of incentives provided.payments (1974, p. 315). A further argumentin favour of his choice is that the price increasesresulting from the September 1954 devaluation (b) Trade policy developmnentscan be assumed to have run their course by thattime. With the increasing overvaluation of the

In the event, wholesale prices rose by 32% in peso, pressures developed to raise protectionMexico and by l0%in the United States between levels. In the early part of the period, tariffs1956 and 1967. With the nominal exchange were raised in the framework of the 1956rate remaining unchanged, the Mexican peso revision of the general tariff classification andappreciated in real terms by 17% vis-d-vis the increased use was made of quantitative importUS dollar during this period (Table 1). restrictions. As shown in Table 3, the number

According to Leopoldo Solis, Head of the of controlled import categories nearly doubledEconomic Programming Group of the Secretary between 1956 and 1962, with their share in theof the Presidency between 1971 and 1975 and total rising from 33 to 44%. In the same period,long-time Director of Research at the Bank of the share of controlled imports in import valueMexico, '1968 . . marked the beginning of the increased from 28 to 52%.inflation period that became rampant in the Under the 1956 Regulation for the Granting1970s' (1981, p. 30). But, inflation accelerated of Import Permits, newly imposed importin the United States as well, so that there was controls were often accompanied by agreementslittle further appreciation in the real value of with firms on the replacement of imports inthe peso until 'the spending spree of 1972' exchange for the free importation of parts,(Solis, 1981, p. 67) under President Echeverria. components and accessories. This regulationAll in all, wholesale prices increased by 52% in was the counterpart of the Law of PromotionMexico between 1956 and 1971, compared to a of New and Necessary Industries, whichprovidedrise of 26% in the US wholesale price index, incentives to newly-established industries as wellwhile the peso-dollar exchange rate remained as to industries where domestic output suppliedunchanged. less than 80% of consumption. Both groups of

Increases in public consumption, with its industries were granted tariff exemptions onshare in the gross domestic product rising from the importation of machinery and of inputs used4.4% in 1956 to 8.1% in 1971, contributed in the production process, thereby increasingsignificantly to inflation in Mexico (Table 2). the level and the variance of effective protection.The increased expenditures augmented the The unification of customs classification indeficit of the public sector that equalled 5.1% 1960 provided another opportunity for raisingof GDP in 1971. The deficit was financed in tariff rates. Subsequently, a surtax of 10% waspart through money creation, leading to the imposed on luxury imports in 1962. Fliially,rise in the ratio of the money supply (money all tariffs were increased by 6 percentage pointsand quasi-money) to GDP from 15.1% in 1956 in 1965.to 16.5% in 1971, and in part by the inflow of The scope of import controls was alsoforeign capital, with Mexico's current account enlarged during the 1960s, with approximatelydeficit rising from 1.4% of the gross domestic one thousand import categories added to theproduct in 1956 to 2.3% in 1971. Increased controlled list every year. By 1970, the numberforeign indebtedness, in turn, gave rise to of controlled items reached 65% of the total

Table 1. Clha iges in real exchiange rates in Mexico, 1956-1980

1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

MEXICO:

Exchange rate (peso-$US) 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12 5 12.5 12 5 12.5 12.5 12.5 12.5 12.5Index of exchange rate 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Dornestie wholesaleprice indox 68.4 71.4 74.6 75.4 79.1 79.8 81.3 81.6 85.1 86.8 87.8 90.3 92.1 94.5 100.0 oUS wliolesale price index 82.3 84.5 85.7 85.9 86.1 85.7 85.9 85.6 85.7 87.5 90.5 90.6 92.9 96.5 100.0 >Iindex of relative prices

vis-d-vis US 83.1 84.5 87.0 87.8 91.9 93.1 94.6 95.0 99.3 99.2 97.0 99.7 99.1 97.9 100.0Index of real excliange rate

vis-a-vis US 120.3 118.3 114.9 114.3 108.8 107.4 105.7 105.3 100.7 100.8 103.1 100.3 100.9 102.1 100.0 <

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 19811V 19821 198211 1982111 Z

E.xcliange rate (peso-SUS) 12.5 12.5 12.5 12.5 12.5 15.43 22.57 22.76 22.80 22.95 24.51 25.68 34 34 46.7 65.5 XIndexotfexcliangerate 100.0 100.0 100.0 100.0 100.0 123.4 180.6 182.1 182.4 183.6 196.1 205.5 274.7 374.1 524.2 ^Domestie wiholesale price index 103.8 106.7 123.6 151.3 167.2 204.5 288.6 334.1 395.3 492.1 613.7 701.4 743.0 858.4 1021.4 °US wlholesale price index 103.3 107.9 122.0 145.0 158.5 165.8 175.9 189.7 213.5 243.4 265.5 268.0 270.2 270.5 272.0índex of relative pricesv'is-d-is US 100.5 98.9 101.3 104.3 105.5 123.3 164.1 176.1 185.2 202.2 231.1 261.7 275.0 317.31 375.5

Index of real excliange ratevis-d-vis US 99.5 101.1 98.7 95.9 94.8 100.1 110.1 103.4 98.5 90.8 84.9 78.5 99.9 117.9 139.6

Source: International Monetary F und, International Financial Statistics.

"o

798 WORLD DIIVELOPMENT

Tablc 2. Balance of paymenrs andi macro-

1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967

Balance of pav,nents($US millions)

MVerchandise:Exports 844 740 752 744 786 844 944 987 1069 1158 1207 1147Iiports 1072 1155 1129 1006 1186 1139 1143 1240 1493 1560 1605 1748Balance -228 -415 -357 -262 -400 -294 -199 -253 -424 -401 -398 -601

SernicesEx.\p orts 421 557 585 657 704 774 875 963of hich: Tourismi 155 164 179 211 241 275 328 363

Border 266 393 407 446 463 500 547 600Asseiin bly 0 0 0 0 0 0 0 0

Imports 262 288 310 350 377 414 479 522ol hich:Tourisin 41 46 66 84 100 119 136 163

Border 221 242 245 265 277 295 343 359Otlher (net) -55 -157 -181 -118 -244 -341 -377 -512Balance 114 119 92 101 104 112 94 90 84 19 20 -71

Goods and services balance -114 -296 -265 -161 -296 -182 -105 -163 -341 -382 -379 -672

Transfers (net) -2 3 1 -1 -5 -13 -15 -17 -11 6 10 20

Current aceount balance -116 -293 -264 -162 -301 -195 -120 -170 -352 -376 -369 -652

Monea> ancd nationalaceounnts(billions of pesos)

Money and qoasi-rmioney 15.1 10.6 18.3 20.2 22.0 23.6 26.0 30.0 35.1 39.2 43.2 47.9Publie consumnption 4.4 5.2 5.9 6.2 8.0 8.6 9.6 14.2 16.6 17.7 20.4 22.5Public investmentPublic sector deficitGross domiestie product 100.6 115.5 128.6 137.7 155.9 165.7 179.8 194.8 221.4 252.0 282.8 300.6Gro.ss doniestie product

$US million 8048 9240 10,290 11,020 12,470 13,260 14,380 15,580 17,710 20,160 22.620 24,050

Ratios to GDPMereliandise exports 10.5 8.0 7.3 6.8 6.3 6.4 6.6 6.3 6.0 5.7 5.3 4.8Merchandiseiinports 13.3 12.5 11.0 9.1 9.5 8.6 7.9 8.0 8.4 7.7 7.1 17.3Mereliandise trade balance -2.8 -4.5 -3.5 -2.4 -3.2 -2.2 -1.4 -1.6 -2.4 -2.0 -1.8 -2.5Service balance 1.4 1.3 0.9 0.9 0.8 0.8 0.7 0.6 0.5 0.1 0.1 -0.2Goods and services balance -1.4 -3.2 -2.6 -1.5 -2.3 -1.4 -0.7 -1.0 -1.9 -1.9 -1.7 -2.8Current account balance -1.4 -3.1 -3.6 -1.5 -2.4 -1.5 -0.8 -1.1 -2.0 -1.9 -1.6 -2.7Moneyand quasi-money 15.1 14.4 14.2 14.7 14.1 14.2 14.5 15.4 15.9 15.6 15.3 15.9Public consumption 4.4 4.5 4.6 4.5 5.1 5.7 5.3 7.3 7.5 7.0 7.2 7.5Public investmentPublic sector deficit

Sources: Balance-of-payments data: 1960-1969, Economlic Policy Reformn ini Mexico, pp. 148-149, other years World BankNational Accounts data from International Financial Statistics, International Monetary Fund, various issues except 1981,DIEMEX-Wharton project.

TRADIC POIUCY IN ME1XICO 799

econiomicdata in Mexico, 1956-1981

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

1250 1455 1348 1410 1716 2140 2999 3005 3476 4604 6460 9286 15,479 19,4021,960 2078 2352 2271 2746 3848 6093 6614 6071 5921 8218 12,137 19,416 24,187-710 -623 -1004 -861 -1029 -1707 -3093 -3609 -2595 -1316 -1757 -2851 -3937 -4785

1145 1290 1252 1410 1658 2069 2501 2622 2769 2647 3922 4580 8218 9266'432 529 415 461 563 724 842 800 836 867 1121 1443714 761 756 856 930 1067 1215 1367 1398 1255 2087 2599

0 0 81 102 165 278 444 454 536 525 714 638644 655 755 785 870 953 1154 1357 1616 1182 2271 2955 6369 9074193 154 170 172 220 258 335 399 423 396 519 714450 502 585 613 649 695 819 958 1193 786 1752 2241

-563 -639 -616 -666 -740 -898 -1243 -1960 -2122 -2170 -2696 -4161 -4485 -7094-61 -5 -119 -33 48 218 104 -695 -969 -705 -1045 -2536 -2636 -6902

-771 -628 -1123 -894 -981 -1489 -2989 -4304 -3564 -2021 -2802 -5387 -6573 -11,687

29 35 55 58 65 74 113 123 156 168 198 224 245 304

-742 -593 -1068 -836 -916 -1415 -2876 -4181 -3408 -1853 -2604 -5163 -6328 -11,383

53.6 61.3 68.8 74.8 83.8 102.6 127 1 151.6 203.6 387.8 618 6 831.3 11.33.9 1629 725.9 28.8 32.6 36.7 43 7 56.1 77.6 110.0 150.9 195.6 240.5 317.0 424.8 606 1

29.2 22.4 33.3 49.8 64.8 95.8 108.6 153.8 222.5 322.8 473 7 681 428.0 23.0 36.0 55 0 67.0 97.0 124.0 125.0 162 0 233.0 313 0 735.0

339.1 374.9 418.7 452.4 512.3 619.6 813.7 1100.0 1371.0 1849.3 2337.4 3067.5 4276.5 5849.0

27,130 29,990 33,500 36.190 40,980 49,570 65,100 79,060 88,880 81,930 102,580 134,510 186,330 238,590

4.6 4.9 4.0 3.9 4.2 4.3 4.6 3.8 3.9 5 6 6.3 6.9 8 3 8.1, 7.2 6.9 7.0 6.3 6.7 7.8 9.4 8.4 6.8 7.2 8.0 9.0 10.4 10.1-2.6 -2.1 -3.0 -2.5 -2.5 -3.4 -4.8 -4.6 -2.9 -1.6 -1.7 -2.1 -2.1 -2.0-0.2 0.0 -0.4 -0.1 0.1 0.4 0.2 -0.9 -1.1 -0.9 -1.0 -1.9 -1.4 -2.9-2.8 -2.1 -3.4 -2.5 -2.4 -3.0 -4.6 -5.4 -4.0 -2.5 -2.7 -4.0 -3.5 -4.9-2.7 -2.0 -3.2 -2.3 -2.2 -2.9 -4.4 -5.3 -3.8 -2.3 -2.5 -3 8 -3 4 -4.815.8 16.4 16.4 16.5 16.4 16.6 15.6 13.8 14.9 21.0 26.5 27.1 26.5 27.9

7.6 7.7 7.8 8.1 8.5 9.1 9.5 10.0 10.9 10.6 10.3 10.3 9.9 10.47.0 5.0 6.5 8.0 8.0 8.7 7.9 8.3 9.5 10.5 11.1 11.66.7 5 1 7.0 8.9 8.2 8.8 9.0 6.8 6.9 7.6 7.3 12.6

data.fromn World Bank data, and public consulnption, public investinent and the public sector deficit that originate from tihe

800 WORLI) DEVE,LOPMENT

Table 3. Iniport lícensing il M,lexico. 1956-- 1979

No. of import categories Iinport value

Total Controlled Free Per cent Total Controlled Free

1956 4129 1376 2753 33 100 28 721962 5204 2313 2891 44 100 52 481964 nl.a. n.a. n.a. n.a. 100 65 351966 11.000 6600 4400 60 n.a. n.al. n.a.1970 12,900a 8400a 4500a 65a 100 59 411971 n.al. n.a. n.a. n.a. 100 57 431972 n.a. n.a. n.a. n.a. 100 56 441973 16,000 12,800 3200 80 100 64 361974 n.a. n.a. n.a. n.a. 100 74 261977 7 3 4 0 b 5 8 5 9 b 1 4 8 1 b 80 b n.a. n.al. n.a.1979 7 7 7 6 b 1 8 6 6 b 5 9 1 0 b 2 4 b 100c 60c 40C

Sources: Except as .- ted, Cárdenas Octega, A. 'Algunes aspectos sobre instrumenites decontrol en la politica de comercio exterior', Inrestigacióni Econónica (January-Marcb1976), Table 3.aLeopoldo Solis, Econoinic Policy Reforíii in Mexico: A Case Study for DevelopingC'ointries (New York: Pergamon Press, 1981).bJosé Antonio Abralham M. and Gabriel del Rio L., 'El comercio exterior Mexicano.Análisis y perspectivas', C'omercio y Desarrollo (Deceniber 1981), p. 8.cDirect coinmunication.

(Table 3). In the same year, the share of increased from 45% to 67%o on non-electricalcontrolled imports in total import value was machinery, from 48% to 88% on electrical59%; while the ratio was lower than the peak of equipment and from 49% to 90%,o on transport65%71 in 1964, this is explained by the increased equipment (ten Kate and Wallace, 1980, p. 136).import share of raw rnaterials and fuels that If we also consider the protectionist measureswere not subject to import controls. taken between 1956 and 1960, it will appear

Table 4 shows the extent of increases in that increases in industrial protection out-effective protection rates in the Mexican weighed the effects of the overvaluation of themanufacturing sector between 1960 and 1 970. peso, thereby contributing to lower importWhile the protection of durable consumer and shares. Rising protection, in turn, increased thecapital goods appears to have risen the least. this bias against manufactured exports as exportwas due to the decline in effective protection incentives were negligible; only 20% ofrates on automobiles from 255% to 111% manufactured exports received preferentialwlhich still remained the liighest in any industry credits in 1969, the extent of credit preferencesother than fertilizers. Effective protectioin rates remained small, and tax rebates on exports

were unimportant during the period. At theT'ablc 4. E,'jjecti¡e protectioni ¡n Mexico. same time, exports suffered the effects of the

196(0 auid 1970 overvaluation of the peso.The effective protection of the primary

Ltfective rate or sector turned negative during the 1960s, withprotectioni effective rates of - 1.4% in agriculture, livestock,

1960 1970 forestry, and fishing and -12.3% in mining(Table 4). In the first case, lower nominal

Prilllary 2.7 -2.7 protection and higher input costs (in particular,A-ricultoire, livestoek, torestry for fertilizer), in the second, the imposition of

aiid lisiinc 3.0 -1.4 export taxes, contributed to this result.Mining -0.3 -12.3 Agricultural exports further suffered the

Non-dutrable gonsumergoods 213.6 31.6 effects of the price policy introduced under theInter cm lsiate eorads 13.2 16.8 aegis of CONASUPO (Compania Nacional de

nuods 64.6 77.2 Subsistencias Populares), established in 1961,that fixed the prices of certain domestically

SotrLe: Adriaan ten Kate and Robert Broice Valliace consumed goods above world market levels.(198())1). 135. With exports sold at world market prices, there

TRADF POLICY IN MEXICO 801

was increased discrimination against export the increased US quota allotment in the case ofcrops, in particular cotton. the latter.

Mexico further experienced an absolutedecline in its exports of nonferrous mrietals

(c) Trade andl iizndstrial gro tJth (silver, lead, and copper) that accounted for15% of total exports in 1955-1957 but for

The increased anti-export bias adversely only 4% in 1970-1972. Al) in all, the volumeaffected the exports of both primary and of Mexican primary exports increased bymanufactured products. The rise in discrimina- altogether 2% during the 1960s while thesetion against cotton explainsthe absolute decline exports rose by 16% in Korea and 18% inin Mexican exports of this commodity between Taiwaii, both of which followed outward-1955-1957 and 1970-1972 (Table 5). With oriented policies. 1

world exports continuing to rise, Mexico's share Mexico also lost market shares in manu-in the total fell from 11.4%X, to 4.9%c, during the factured exports. Between 1960 and 1970, itsperiod. Mexico's share declined in the world manufactured exports grew at an averageexports of beef and coffee as well. In turn, annual rate of 5% in volumne terms, comparedincreases in its share in the world exports of to increases averaging 16% a year in the exportscattle and sugar are explained by the rise of of developing countries to developed countryUS demand in the case of the former and by markets (Balassa, 1981, p. 265). Korea and

Table 5, Mexicanz traditional exports, 1955/57 -1978/80

Average Average Average Averag.e1955- 1957 1970-1972 1975 -1977 1978--1980

Bovine cattle:,; of world 9.1 12.3 6.0 8.4

World (tlioosand liead) 2583.0 7207.8 6799.8 7249.0Mexico (thotisand liead) 234.9 885.4 410.6 609.5

Bovine mieat:',; of world i.8 1.8 0.7 0.7

World (thousand tonnes) 390.7 2135.7 2635.3 3315.4Mexico (thousand tonnes) 7.1 37.9 17.2 22.7

Tomiiatoes. Frenchof', world n.a. 23.0 23.7 23.0

World (thousand tonnes) n.a. 1462.8 1561.2 1793.8Mexico (tlhousand tonnes) n.a. 335.9 370.0 411.9

Stigar, raw equivalent', os orld 0.5 2.6 0.2 n.at.

World (tlho usanid tonnes) 14,592.0 21,787.0 24,389.3 26,646.0Mexico (thousand tonnes) 72.8 567.1 54.1 n.a.

Coffee. green'; of world 3.7 2.8 4.1 3.8

World (thoosanid tonnes) 2220.0 3360.2 3394.0 3660.8Mexico (tliousand tonnes) 82.1 94.2 138.9 139.9

C'otton, lint'; of world 11.4 4.9 3.6 4.2

World (thousand tonnes) 3093.0 4009.4 3946.3 3660.8Mlexico (thoosanid tonnes) 352.7 194.6 143.5 194.6

('rustaeans and moolltisesof world n.a. 6.1 4.2 3.7

World (tllousand tonnes) n.a. 533.0 797.9 1072.4,Mexieo (thloosand tonnes) n.a. 32.6 33.7 39.2

Sourcc: FAO. Trade Yearbook. various issues; FAO, Yearbook oj Fishlerv Statisticsvariolls issUes.Note: T11 table incloides P)rinary jproducts thiat accountitd for more tlian 1 .5' of Mexicanmlerelianidise e.xports in 1970 1972.

802 WO)RLD D1VFLOCPMENT

Taiwan much exceeded the average; manu- expectations induced people tc, economizefactured exports rose 33% a year in the first with cash reserves.case and 24% in the second. The macroeconomic policies applied con-

With slow increases in manufactured exports, tributed to inflation with a time lag. Aftertlieir contribution to tlie growth of industrial rising by 3% in 1 972, wholesale prices increasedoutput was only 3'1/ in Mexico while it was 45% by 16%1 in 1973 and 22% in 1974. Whilein Korea and 51%, in Taiwan. In turn, in response inflation accelerated in the United States also,to protection, the contribution of import Mexico's real exchange rate appreciated by 4%substitution to industrial growth was 11% in vis-a-vis the US dollar between 1971 and 1974.Mexico; it was - 2%1, in Korea and 3', in Taiwan The extent of appreciation reached 5% in(Clhenery, 1980, p. 281).2 1975 and 13% in the second quarter of 1976,

immediately preceding the September de-valuation (Table 1). On 1 Ser,tember 1976, the

3. THE- ECHE VERRIA EXPANSION exchange rate was set at 20 pesos to tlie dollar,(1 972 -- 1 976) with a second devaluation taking place within a

few months.(a) MlIacro)euoiiw,nzic backgrountd

Leopoldo Solis speaks of 'the loss of budget (b) Trade policyi, developinentsdiscipline . . . as spending programs weredirectly promoted by the President [ Echeverria ]j' The increasing overvaluation of the peso led(1981, p. 68) after March 1982. The share of to pressures for higher protection. Increases ingovernment consumption in the gross domestic the scope of quantitative restrictions broughtproduct increased from 8.1%, in 1971 to 8.5% the share of controlled imports in total importin 1972, rising further to 10.0%'s in 1975 (Table value from 57% in 1971 to 64%81 in 1973 and to2). Inercases were even larger in public invest- 74%L in 1974 (Table 3). As the balance-of-ment, with its share in GDDP rising from 5.0% in payments situation deteriorated, import controls1971 to 8.7'", in 1975. As social transfers were tightened further in 1975. In the sameincreased at a higher, and public revenues at year, a general increase of tariffs was undertaken.a lower rate, the deficit of the public sector While estimates of effe-ctive protection forrose from 5.1' of GDP in 1971 to 8.8% in 1975. 1975 are not available, it appears tint the level

The deficit was increasingly financed by of industrial protection was substantially higherforeign borrowing that provided 32'% of the net iíi 1975 than in 1970. But, prior to the imple-financial requirements of the public sector in menta.ion of expansionary measures, an ezport1971 and 50% in 1975. Foreign borrowing promotion scheme was instituted followingmade it possible for Mexico to maintain the recommendations mrade by the author. Thisexchange rate at 12.50 pesos to the US dollar involved the introduction of the CEDI (Certi-until September 1976 whilethe curreit account ficados de Devolución de Impuestos) scheme;deficit increased from 2.3% of GDP in 1971 the duty-free importation of inputs; theto 5.3% in 1975. expansion of the scope of short-term export

The deterioration of the current account credits provided by FOMEX (Fondo para elreflected largeiy the direct (through import Fomento de la Exportación de Productosleakages) and indirect (through rapid inflation) Manufacturados); the establishment of FONEIeffects of expansionary fiscal policies on (Fondo Nacional de Equipamiento Industrial)imports. The subsequent slowdown of import to finance export-oriented and efficient import-growth, associated with lower rates of growth substituting investments; and the creationof public expenditures. reduced the ratio of the of IMCE (Instituto Mexicano de Comerciocurrent account deficit to GDP to 3.8% in 1976, Exterior) to increase export promotion efforts.but this ratio still remaioed substantially above Under the March 1971 regulations, a 10%the 1971 level. With higher foreign borrowing, tax rebate in the form of certificates, or CEDIs,Mexico's debt service ratio reached 88% in was provided on the value of manufactured1976. exports in cases wllen domestic content

Expansionary fiscal policies led to increases exceeded 60%; the rebate was 5% when domesticin the money supply averaging 22%7 a year content was between 50 and 60%; it was nilbetween 1971 and 1976, approximately double below this threshold. Rebate rates were increasedthe rate of growth of the previous fifteen years. to 11% and 5.5%, respectively, two years laterNevertheless, the ratio of the money supply to when indirect tax rates were raised.GDP fell from 16.5% to 14.9% as inflationary Exporters whose products had at least 40%

TRADE POLIC'Y IN ílMEXICO 803

domestic content were eligible fur the duty-free overvaluation rising further until Septemberimportation of inputs. Also, exporters with a 1976, the volume of Mexican manufactured50% domestie content could receive preferential exports in 1976 remained 1 8% below the 1974export credits; in 1973, one-third of manu- level. By contrast, the 1976 manufacturedfactured exports received such credits. with the exports of the developing countries to theresulting subsidy averaging 1.5% of the value of developed countries exceeded the 1974 levelthese exports. by 25% (.Balassa, 1981, p. 265).

FONEI was to grant preferential credits for In the 1970 -1975 period, exports con-the purchase of machinery and equipment while tributed to the growth of manufacturing outputIMCE was set up to provide information on more than import substitution (8% vs 3%),export possibilities, to organize commercial although in this respect Mexico remained muchmissions, and to extend the network of belind Korea where the contribution of exportscommercial attachés. Also, in 1 972 the export- to output growth was 62% between 1970 andimport link system introduced for automobiles 1973 (Chenery, 1980, p. 284). While higherthree years carlier was substantially revised, protection compensated for the increasing over-mandating automobile manufacturers to cover valuation of the peso, import substitution ina rising proportion of their imports of auto- Mexico was limited by the import leakagesmobile parts, components, and accessories by associated with expansionary fiscal policies.exports. Correspondingly, the share of imports in

The CEDIs were discontinued on the occasion GDP rose from 6.3% .in 1971 to 8.4% in 1975,of the September 1976 devaluation, but were subsequently declining to 6.8% in 1976 as thereinstated soon afterwards. In view of the growth of public expenditures slowed down.cascade-type system of indirect taxes applied at In turn, after temporary increases, the share ofthe time, it is difficult to judge the extent to exports in GDP returned to the 1971 share ofwhich the CEDIs represented reimbursement 3.9% in 1976 (Table 2). As noted above,for taxes actually paid. But, the fact remains manufactured exports grew rapidly in the earlythat their introduction increased incentives to 1960s in response to the incentives provided,manufactured exports. but declined afterwards when the overvaluation

The special treatment accorded to assembly, of the peso was increasingly felt. For the periodor maquila, industries in the border areas taken as a whole, primary exports fell inantedateb the introduction of the CEDIs, but absolute terms as the overvaluation of the pesoit was formalized in legislation only in 1971. was not offset by export incentives. The declineThese industries import materials, parts and extended to most of Mexico's major primarycomponents duty free from, and re-export the export commodities (Table 5) while newassembled product to, mostly the United States, primary exports failed to develop.where duty is paid on the value added onlv.After October 1972 maquila status was alsogranted to firms in the interior that exported 4. THE LÓPEZ PORTILLO PERIODunder similar conditions. (1977--1982)

(a) Alacroeconomnic backgrounzd(c) Trade and indust)rial grou th

The expansionary policies adopted byThe exports of assembly industries were first President Echeverria in March 1972 followed

reported in Mexican balance-of-payments the application of deflationary measures in thestatistics in 1970. From a net value of $81 first year of his Presidency, aimed at reducingmillion in that year, maquila exports passed the the deficit in the current account of the balancehalf billion mark in 1976. In the samne year, of payments from tlie level of 3.2% of GDPtheir gross value came to exceed that of (non- reached in 1970 (Table 2). These measuresmaquila) manufactured exports reported in involved a slowdown in the growth of publictrade statistics. consumption and a reduction in public invest-

Under the impulsion of export incentives, ment, both expressed in constant prices. InMexican manufactured exports increased rapidly turn, the expansionary policies of 1972- 1975between 1970 and 1974, rising by 607 in led to rapid inflation and to the deteriorationvolume terms.3 They declined, however, in of the balance of payments, with the exchange1975, in part because of the world recession rate remaining unchanged. They were followedand in part because of the increasing over- by a slowdown in rhe growth of publicvaluation of the peso. With the extent of consumption and a decline in public investment

804 WORLD DEVELOPMEN T

in 1976, and the exchange rate was repeatedly offsetting the devaluations of 1976 and 1977.devalued later in the year. By the end of 1981, the extent of appreciation

Similar stages are observed in the policies of the real value of the peso was 29% comparedfollowed by President López Portillo. In 1977, to 1977 and 8% compared to 1975;it was 21%the volume of public consumption and invest- compared to 1971 and 35% compared to 1956ment remained virtually constant. In subsequent (Table 1).years, there followed a period of budgetary The devaluation of the peso was avoidedexpansion, ]eading to rapid inflation while the through increases in oil revenues and in foreignnominal value of the peso was kept virtually borrowing. As far as the non-oil commodityunchanged. Finally, in the last year of López sectors are concerned, it may be said thatPortillo's Presidency, economies in public borrowing abroad added 'insult' to the 'injury'expenditures were made and the peso was resulting from the rise of oil exports as thesedevalued to a considerable extent. The following sectors increasingly suffered the effects ofdiscussion will concentrate on the expansionary maintaining the nominal value of the pesophase. unchanlged in the face of rapid inflaLion.

Between 1 977 and 1 981, public consumptionincreased by nearly one-half and public invest-ment doubled in volumne terms. But, data (b) Trade policyv developmentsexpressed in terms of constant prices do notappropriately indicate the extent of the The 1976-1977 devaluations and theexpansionary policies, which occurred as the important oil discoveries of these years hadexchange rate was maintained between 22.5 proniised a comfortable balance-of-paymentsand 23.0 pesos to the U.S. dollar and the rate positioni for Mexico. In fact, with the triplingaveraged 24.5 pesos to the iollar in 1981. In of petroleum exports and the favourable effectscurrent prices -- and hence in terms of US of the depreciation of the real exchange rate ondollars - public consumption increased threefold non-oil exports, the ratio of the merchandisebetween 1977 and 1981 while public investment trade deficit declined from 4.6% of GDP inmore than quadrupled. 1975 to 1.6% in 1977. These improvements,

It had been assumed that the tax paid by and the potential for future increases inPEMEX from its rapidly growing oil revenues petroleum exports, provided the basis for awould finance much of the expansion of campaign to lower levels of import protection.government expenditures. However, PEMEX This campaign reflected the perception thatundertook a large investment programme and import liberalization was necessary in order tohad to increasingly subsidize its domnestic reduce the existing bias against exports and tosales. As a result, its deficit approximately raise levels of efficiency by exposing Mexicanmatched the amount of the tax paid to the industry to foreign competition.government budget. At the same time, the In the event, the share of commoditydeficit of the public sector, including PEMEX, categories subject to import licensing wasrose from 6.8% of GDP in 1977 to 12.6% in reduéed from 80% in 1977 to 24% in 19791981. (Table 3). These changes were accompanied

The deficit of the public sector was financed by increases in tariffs, so as to permit firms toin part by money creation and in part by foreign adjust to the liberalized import regime. Tariffborrowing. The growth of the money supply increases were supposed to be temporary but,accelerated, reaching 27.9% of GDP in 1981 with the subsequent appreciation of the realcompared to 14.9% in 1976 and 21.0% in 1977. value of the peso, the higher tariffs were main-In turn, the rise in foreign borrowing brought tained and were subsequently raised further.the debt service ratio above 100%. The extent of import liberalization was more

The expansionary measures applied led to limited in terms of import value. It has beenan acceleration of inflation with a time lag. reported that about 60% of imports were subjectWholesale prices rose by 16% in 1977 and in to licence in 1979. This share was substantially1978, 18%7o in 1979, 24% in 1980, and 25% in lower than the 74% share in 1974, but it was1981. In turn, after maintaining the exchange higlier than in the early 1970s. While the highrate in the 22.5--23.5 pesos to the dollar range share of capital goods imports raised the valueuntil early 1981, the small devaluations in the of items subject to import licence, it wouldremainder of the year brought this rate to only appear that a substantial nuinber of liberalized26.2 pesos to the dollar at the end of 1981. items had little importance in Mexican imports.

As a result, the peso appreciated to a In fact, import liberalization in the yearsconsiderable extent in real terms, more than 1977-1979 appears to have been concentrated

TIRADE. POLICY IN MIFXIC O 805

on items where domnestie producer interests compared to a 24% rise for developing countrywere at stake to only a limited extent. In late exports to the developed countries. The1979 and early 1980,the Secretaria de Comercio comnparisons are much less favourable forprepared plans for further import liberalization Mexico if the entire 1973--1978 period isthat would have increased foreign competition considered, when the relevant figures are 16%to a considerable extent. However, with the and 63% (Balassa, 1981, p. 265). Yet, this is aappreciation of the real exchange rate, further more appropriate comparison, since increases inimport liberalization was not undertaken. Mexican exports after 1976 in part compensatedRather, the decision taken by President López for the declines of the previous years.Portillo against (GATT membership in March The volume of Mexican manufactured1980 marks the beginning of a period of exports fell by 14%, between 1978 and 1981,renewed import restrictions. reflecting the adverse effects of the increased

The reimposition of import restrictions overvaluation of the peso and of rising importassumed momentum in 1981 when tariffs were protection. In the same period, there was analso increased. Restrictions were tightened increase of 13% dollar terms as compared to afurther, and tariffs wereraisedagain,in response 58% rise in the manufactured exports of theto the foreign exchange crisis of 1982. Although developing countries to developed countryexport subsidies were increased by providing markets reported by GATT. Also, an absoluteCEDIs averaging 8% oni export value in addition decline is shown in the dollar value of Mexico'sto the rebate of the newly-introduced value manufactured exports if one excludes chemicals,added tax, this was far from sufficient to offset based largely on petroleum, and automobilesthe rise in import protection. As a result, the and automobile parts, the exports of which arereduction in discrimination against exports in regulated under the export -import link system.1977- 1979 gave way to an increased anti- All in all, Mexico's exports other thanexport bias. Manufactured exports further petroleum and petroleum products stagnated insuffered the consequences of the overvaluation dollar terms between 1978 and 1981 while itsof the peso that was offset only in small part exports of petroleum and petroleum productsby the production subsidies provided under the rose sixteenfold. This did not suffice, however,March 1979 programme of industrial develop- to avoid an increase in the current accountment. Net subsidies to manufacturing value deficit that reached 4.8% of GDP in 1981. Foradded rose by only 3 percentage points between one thing, imports rose much more rapidly than1975 and 1 980, that is dwarfed by the increasing the gross domestic product as the expansionaryovervaluation of the peso. macroeconomnic policies gave rise to large import

The appreciation of the real exchange rate leakages. For another thing, the balance ofadversely affected primary exports also, and the service transactions deteriorated to a consider-introduction of the Sistema Agricola Mexicana able extent, reflecting the decline in the tourism(SAM) further discriminated against agricultural balance brought about by the appreciation ofexports. Under SAM, support prices were raised the real exchange rate and the rising cost ofon crops destined for domestic consurrption, servicing the foreign delt.the-eby giving further impetus to the shift ofirrigated area from higher-value export crops tolower-value domestic crops. 5. POLICY IMPLICATIONS

(a) Macroeconzorníc policies and trade policy(c) Trade ald indutstrial grou thz

This overview has shown the interdependenceThe effects of the measures applied are of macroeconomic and trade policies in Mexico.

apparent in the unfavourable developments Under fixed exchange rates, expansionary fiscalexperienced by several of Mexico's principal policies repeatedly led to the overvaluation ofprimary export products between 1975-1977 the peso that, in turn, triggered the applicationand 1978 -- 1980. Furthermore, the dollar value of protectionist measures. And while trade wasof the exports of food, beverages and tobacco liberalized after the devaluations of 1976--1977declined in absolute terms in 1981, falling 21% that improved the competitiveness of Mexicanbelow the 1979 peak that represented the industries, this lasted only until the peso becamedelayed effects of the 1976-1977 devaluations. overvalued again.

The devaluations also gave a boost to The results also indicate the sensitivity ofrnanufactured exports which increased by imports and exports to the incentives provided.48% in volume terms between 1976 and 1978, The overvaluation of the peso stimulated

806 WORLD DEVFLOPMI`NT

imports while higher protection had the opposite (b) Policj alterniatives Jor Mexicoeffect, Apart from the 1 976-- 1977 devaluations,the real value of the exchange rate continued In reviewing the situation created by theto appreciate in Mexico, with the extent of policies applied, in early 1980 the authorappreciation attaining 35'% at the end of 1981 suggested 'the need to reduce reliance onforeigncompared to 1956. In turin; the 1977 -1979 borrowing and to accept exchange rate changesimport liberalization aside, import protection for the sake of improving the competitivenessincreased during the period. Changes in these of the non-oil secLor in Mexico. This wouldvariables largely explain variations in import require first of all reducing the budget deficit.shares over time, Witli spillover effects raising It would further be necessary to introduceimports during periods of expansionary rigorous project evaluation for public invest-policies.4 ment' (Balassa, 1 980, p. 138).

Fxports suffered discrimination through the The recent devaluations of the peso provideeffects of overvalued exchange rates as well a basis for the adoption of appropriate policies.as import protectioni. Discrimination against Also, with a considerable part of oil earningsprimary exports increased over time, except utilized to service the debt, the exchange ratefor the period of the 1976- 1977 devaluations can be maintained at a level that does notand the 1977-1979 import liberalization discriminate against tne non-oil sectors forinterlude. In the case of manufactured products, years to come. In the following, considerationthe export incentives granted in the early 1970s will be given to the choice of macroeconomicalso reduced the extent of anti-export bias. policies, improvements in the system ofHowever, by 1979, the adverse effects of the incentives, and the reform of trade policies.appreciation of the peso more than offset theresulting benefits, with a further deteriorationin the comnpetitive positioin of Mexican exports (i) Macroeconzomic policy alternativesoccurring in the following two years. For theperiod as a whole, Mexico exhibited poor Solis compares three possible courses ofperformance as regards both non-fuel primary action as far as Mexican macroeconomic policiesand manufactured exports. are concerned: '(a) inflation, with cyclical

The overvaluation of the peso was maintained behavior of the "stop-go" type; (b) recession,by borrowing abroad. Foreign borrowing can with lower inflation rates and increasingprovide only a temporary remedy, however, unemployment; and (c) moderate growth, withunless the proceeds are invested in efficient declining inflation followed later by higher

activities. This will not be the case if inefficient growth rates' (1981, p. 124). He dismisses theinvestments are made in the public sector and first alternative, which led to unfavourableif inappropriate incentives are provided to the results over the past 25 years, criticizes theprivate sector through overvalued exchange rates second, which he ascribes to the IMF, andand high protection. In such conditions, the endorses the third.accumulation of external debt will eventually Solis' preferred alternative could not findgive rise to a foreign exchange crisis. application, however, in the period of foreign

Such crises occurred twice in Mexico, at the exchange crisis Mexico is experiencing today.end of periods of expansionary policies under Rather, the magnitude of the necessary adjust-fixed exchange rates. The two occurrences ment to remedy existing imbalances in theprovide remarkable parallels as deflationary Mexican economy has required the applicationpolicies were followed by expansionary fiscal of deflationary policies. At the same time,measures, leading to the overvaluation of the reducing the balance-of-payments deficit in aexchange rate, increased foreign indebtedness, situation of stagnant output necessitates cuttingand higher protection. aggregate expenditures.

Mexico missed an opportunity to escape this Mexico is not alone in this regard. Invicious circle at the beginning of López Portillo's Turl.ey, the balance-of-payments deficit wasPresidency, when the devaluation of the peso substantially reduced following the applicationand increases in oil earnings permitted lowering of deflationary policies in 1980. Amongprotection and provided the basis for socialist countries, Hungary effected a largeharmonious economic growth. The opportunity shift in the balance of trade from deficit towas missed and the policies applied led to the surplus through expenditure reductions withinaccumulation of foreign debts, reaching $80 a short period.billion in late 1982. The first priority for Mexico is to reduce the

deficit of the public sector that was translated

TRAD)I POLIC) IN MI UXIC(O 807

into unsustainable doinestic expansion and given to eventually privatizingpublic enterpriseslarge-scale foreign borrowing. The governrnent's in industries allocated to the private sector.agreemnent with the IMF reportedly stipulates Finally, one may welcolne the intentionlowering the deficit from 16.5%,ó of the gross expressed by the governmnent to increase thedomestie product in 1982 to 8.5%, in 1983 and attractiveness of Mexico for foreign directto 4.5%. by 1985. While the measures taken so investinent. Such investment brings techno-far have largely involved increasing taxes and logical know-how and marketing expertise,raising the prices of public goods and services, it together with capital, and it pays dividendshas been proposed to cut public expenditures from profits earned rather than giving rise toby 15%1 in real terms in 1983. This is indeed fixed incoine obligations.desirable as public spending has increased at a At tlie saine time, one should avoid arate disproportionate with the capabilities of situation where profits are made as a result ofthe Mexican economy. Also, the prices of high protection. Decrcases in import protectionpublic goods and services would need to be would also be necessary in order to eliminateincreased further and subsidies to consumer excessive profits in private business, to improvegoods reduced. the efficiency of the Mexican manufacturing

Increases in the prices of public goods and sector, and to reduce the bias against exports.services and reductions in subsidies to consumner Deductions in protection should be undertakengoods, together with the price-raising effects of in the framnework of a time-phased reform ofsuccessive devaluations, lower real wages. the system of incentives.Aiming at nominal wage increases to fullycompensate for the rise in prices would becounterproductive, however, as it would (ii) Refórmi¡ng tlie s istem of incentivesengender an inflation-devaluation spiral, anddecreases in real wages are necessary in view While the application of adeflatioiiary policyof the need to improve the balance-of-payments. has been necessary under present conditions,Nor can profit margins be maintained as weak it would have to remain temporary lest excessivedomestic demand does not warrant increasing social tensiolns be created. Rather, the processprices to fully compeiisate for a rise in costs, of adjustmnent should increasingly involveand lower profit margins are also necessary for raising output, so as to utilize the productionimproving the balance-of-payments. capabilities of the Mexican economy while

While the private sector has to accept a lowering unemploymnent. This would, in turn,decline in profit margins, it needs assurances require substantially reducing the extent ofthat it will not be discriminated against in the price distortions.allocation of foreign exchange and domestic Again, Mexico is not alone in this regard.credit. Rather than foreign exchange budgeting In Turkey, the January 1980 reforms involvedthat considers allocations to the private sector a large devaluation and extensive price liberaliza-as a residual, cuts in the foreign exchange tion, with interest rates freed six months laterrequirements of the public sector should be (Balassa, 1983a). In Hungary, deflationarycommensurate with reductions in foreigri policies were accompanied by the reform ofexchange availabilities to the private sector. producer prices and reductions in consumerFurtherl ore, the nationalized banks should subsidies, followed by a devaluation and thegive equal treatment to the public and to the raising of interest rates (Balassa, 1 983b).private sectors. It would be inappropriate The extent of price distortions was especiallyto introduce non-economic considerations in large in Mexico in recent years. Apart fromlending; such considerations should be left to overvaluation of the exchange rate and highthe government budget. import protection, the prices of public goods

There would further be need to delineate the and services, in particular transportation andscope of activities of the public and the private energy, were kept at excessively low levels;sectors in manufacturing industries, with consuiner staples received substantial subsidies;distinction made between sectors that are in the and the prices of a large number of goods werepublic domain (e.g. basic petrochemicals), controlled. Also, real interest rates becamesectors where public and private enterprises increasingly negative.co-exist and compete (e.g. steel), and sectors The devaluations effected in the course ofthat are the domain of the private sector (e.,. 1982 haye remedied the long-standing over-clothing). This would involve the nationalFzed valuation of the peso, and it is now plannedbanks divesting themselves of the large buAk of to adjust the exchange rate pari passu withenterpríses they control, with consIderation domestic inflation. In this respect, one may

808 W'ORL L) DIVLOPMIFNT

refer to the example of Turkey. where a large Cambridge School, some would opt for adevaluation was followed by exchange rate protectionist policy that would increasinglyadjustments in line with domestic inflation, isolate Mexico from world markets. Recom-leading to rapid increases in exports. mendations have also been made for increased

The prices of public goods and services have state intervention in international trade (Ruiz,also been raised in Mexico, but much rernains 1981).to be done. While the price of gasoline was Protectionist policies have been advocateddoubled in December 1982, with the subsequent on the assumption that Mexico's large domesticdevaluation of the peso a gallon of regular market can support practically all industries.gasoline again costs less than a dollar. Also, the This argument conflicts with the experience ofdomestic price of fuel oil is only one-seventh of present-day developed countries. In fact,its export price and the average domnestic price countries such as France and Germany, whoseof petroleum products does not reach $10 per effective market size for industrial products isbarrel at the present exchange rate of 96 pesos eight to ten times greater than Mexico's, rely onto the dollar. At the samne time, the price of a international specialization to ensure efficientsubway ticket in Mexico City remains one peso production. In new, technologically advancedand that of public telephones 20 centavos. industries, US firms also derive considerableFinally, the prices of the principal consumer benefits from reliance on the world market.staples are kept low through subsidies. In Mexico, the domestic market can rarely

Rather than adjusting prices in instalments, ensure the product specialization necessaryan immediate and full adjustment was effected for efficient production in non-traditionalin Turkey in January 1980. This policy did not industries, such as capital goods and electronics.allow a build-up of political pressures that To attain this objective, domestic sales wouldmight have jeopardized subsequent price need to be supplemnented by exports. Exportincreases. In Mexico, further increases in the expansion, in turn, requires avoiding a bias ofprices of public goods and services would need the system of incentives against exports.to be undertaken at an early date, lest pressures Correspondingly, to the extent possible, infantdevelop against such increases. industries would have to be promoted by the

Subsidies to consumer goods would also use of subsidies rather than protection.need to be reduced and agricultural prices It would further be desirable to modifyliberalized as the policies followed in the policies pertaining to existing industries. Aspast had adverse effects oni agriculture and suggested by Héctor Hernández Cervantes,contributed to migration to the cities and in there is need to rationalize protection whenparticular to Mexico City, where living costs 'the rationalization of protection wouldwere kept low through subsidies. Finally, contribute to the reversal of the conditionsincreasing economic efficiency would require that discourage exports, and would createthe continuation of the process of liberalization structural conditions that favor themof industrial prices that began in December 1982. ( 1981, p. 40). The rationalization of protection

Interest rates were also raised in December would involve liberalizing imports and reducing1982 but real interest rates continue to be the overall level of tariffs as well as tariffnegative. In order to encourage savings and to differentials among commodities. This mayensure the rationing function of interest rates be accomplished according to a time-tablefor bank lending, it would be desirable to raise determined in advance, so as to give businessthese rates above the expected rate of inflation. sufficient time for adjusting to lower protection.

To begin with, there is need to re-establishthe programme of import liberalization halted

(iii) Trade policj reforin in 1980, with a view to abolishing importlicensing over a predetermined period. Import

As noted above, the reform of trade policy licensing becomes increasingly inadequate in awould have to be part of the general reform of modernizing economy: it raises the cost ofthe system of incentives. In the following, production, with unfavourable repercussionsrecommendations are made for a medium-term for exports at the higher end of the productionreform programme that may be carried out over chain; it creates scarc,ty margins for thea period of several years once the balance-of- recipients of licences that are difficult topayments situation improves. measure; and it raises the danger of corruption

For some years now, divergent views have as the decision-making process necessarilybeen expressed as to desirable trade policies for involves subjective elements. By contrast, theMexico. Following in the footsteps of the application of tariffs is automatic and decision

TIRADLI POLICY( IN M1XICO 809

on imuportation is made by the user who will Investment incentives are preferable totake aceount of tariff-incltusive price differenices direct export subsidies that invite counter-between domnestic and foreign producits, as well vailing action, And while the taking of suchas quality, specifications, and the conditions of action in response to investment incenitivessale. favouring exports may not be excluded, unider

The elijnination of import licensing should GATT rules couLntervailinig duties cannot bebegin with inputs, including capital goods, that imposed unless injury to doniestic industry isaffect the cost of coniunodities at higher levels proven. Al the samne timle, giveii Mexico's smnallof fabrication, including exports. Luxury share in sales of manufactLired goods, a rapidcon1suLmTer goods can be left to the last. but expansion of its exports would rarely tlhreatenthcir importation may also be liberalized since inijury even in the ULnitedl States.governníjent revenues woLild be increased by Uintil 1 980, the United States invoked tiheputting high taxes on the sales of luxury 'grandfaher clau1ah' to impose counitervailingcommodities. duties witllout havinig tu establish tlie exismnce

Hfigh taxes are preferable to tariffs that of injury. In subscribing to tlie subsidy codeencourage the dornestie production of luxuiry under the Tokyo Rounid, tdie US gave upgoods. At the saíne time, levying taxes at tlie tliis priviluge, exccpt. in responise to exportpoinit of sale may also apply to snmuiggled sublsidizatioln on the part of conijitries wliich aregoods which enter distribtution chaniels. Such not memblrs of GATT.smugglingrenders the importlicensing of various With tile United States represenitinig tl1luxury goods largely futile at present. plincipal tlircat of counltervailing action foi

c;reater reliance on excise taxes orí luxury Mexico, tlie Toklyo Rounid agreernents liavegoods thus permits redlucing tariffs on sueli greally increased the benefits Mexico wouldgoods. In general, one rnay set a tariff ceiling of derive froiim GAl1 menblilersimip. Tliis conclusioni25'", that has traditiolnally heen considered t1e is strenghtliene(l it \,xe consider that mmelbersliipmaximuin desirable price differential hetween is also a condition fo: tdle application of timedoí-nestic and equivalent foreign products in otller codes. inclhding time goveriment procure-Mexico. Witllin this ceiling, tariffs may rise ment code, adopted in tlie framieworlk of tliefrorn products at a lower level to those at a TIokyo Round. ,Uso. under lllese codes, GATThiglier level of fabrication for products using nmembers íiiay take ,t-tion againist an offendingexportable iiiputs, witli a view to equalizing party .tlie protection of value addled (effective A farthmer advanltage of GATT inícmmberslhipprotection).5 Tihe pi-oposed reforin muiay be for Mlexico is tliat bilateral negotiations withinshituted in annual inistalnlments over a periotd tlie Uímiled States would be replaedcl lby theof, say, five years. applicationi ot multilateral rules. Last buí not

Notwitlistamjding tite liberali¿atiolí of imnports least, ini cooperalion with otlier developinganid ieductions in tariffs, tliere would remiain a couintries, NMexico may influienice the develop-bias againist exports. Correspondingly, tliere is nilet oi new rules in GATT. In so doilig, Mexiconcecl or export proniioting imeastures as suggested woLIld ioí coultries, sueli as Brazil and India,by lleriiáiidez (). cit.. p. 40). Tulis would tliat lyave become autive in GATT affairs.reqluire :e-establishliig tlie C'H l)1s abolishled in At tlie saume timne, th1 clainis of time lcal1982 at rale. dlmat compensute for taxes oní adllierents of l}e Camnbridge Sclhool, thiatiniputs ised directly in exports ammd ¡n time lMexi,co woul(d se ioLisly compromnise its freedoimiproduction of inptuts for export. Fxporiters of action bl' eitering G(ATT, (lo not stand npsloulld also liave ac:ess to imported inputts duty to serítiny. Several socialist conotries, suchfree, witli the rebating of tariffs oun direct and as llungary, are loing-standling mmenbers ofindirect imiiported inplits. GAITT as tliey Iuyve regardled the benefits of

It would fturtlier be desirable to provide iiieínblersimip to far exceed tlie cost involved inpreferenltial loans for investmient in exports, applpving GiA-1TTs rather flexible rules.witli tie acttlal interest differential depeniding Mlexico would furtlter beneflt fromii tlieon the sliare of pro(lucts exported. For reasolis expansion of nmaquila indlustries. At thie sanienoted above, a1dditional investmiienlt incelltives timne, tliese indtustries would necd to bemuiay be provided to infanílt indlustries. Thie ijíc cuíilv injtegratedi witli tle rest of tlieincentives should be granted in a form that ecnomny. This prtupose would be served bvdoes iiot favonii capital-intensive iíídustries aid allkwinig mnaqúuila indtustries to sell in doniesticproduction methods as has often teien tlie case noarkets aild by ¡iv i pri ng time trarísportatiolnin tlie past. Similar conisideratiosi apply to network so as to redluce thIe cost of ltsingincentives for regional developínent. domestic inputs.

810 WORIA) D)EVIELOPM1ENT

Under appropriate incentives, Mexican reforming trade policy, with a view to movingagriculture could undertake efficient exporting towards an outward-oriented developmentas well as imnport substitution. Tliis mould strategy in Mexico. Such a strategy has beenrequire approximating world market price shown to be superior to inward orientation in

relations in regard to both products and their developing countries during the 1960-1973inputs. Agriculture would also need to be period of rapid growth in the world economnyprovided with more investment funds than as well as in the subsequent period of externalheretofore. shocks (Balassa, 1978 and 1982).

In providing similar incentives to sales indomestic and in foreign rnarkets, an outward-

(e) Con cludinig rcmnarks oriented development strategy prornotes exportsas well as efficient import substitution. The

This review of Mexican trade policy over the capital goods industries and agriculture providelast quarter of the century has shown that examples, where exports and import substitutionMexico's present economic difficulties date could procecd in a parallel fashion in Mexico.back to the beginning of the period, when Maintaining the actual exchange rate constantincreases in public consumption contributed to in real terms would provide considerableinflation and to the appreciation of the peso in incentives to exports and to import substitution,real terms under fixed exchange rates. The leading to improvements in the balance ofovervaluation of the exchange rate, in turn, led payments through increases in output and

to the application of protectionist measures employment in the present situation of large

that permitted the establishment of inefficient excess capacity. Tlie experience of the lastactivities oriented towards the domnestic market quarter of the century indicates the sensitivity

while discriminating against exports. of exports and imports to the exchange rate in

The situation was aggravated by the Mexico. More recently, Turkey provides a case

excessively expansioniary policies pursued by where exports grew substanltially in responsePresident Echeverria in 1972--1975 and by to increased incentives in a difficult worldPresident López Portillo in 1978- 1981. II both environment. In Mexico, exports should benefit

cases, deficits in the public sector necessitated from the economic recovery in the United

substantial foreigii borrowing as rapid inflation States and Japan in 1983, and they inay also begave rise to the appreciation of the real exchange oriented to developing :ountry markets.rat'i underthefixedrate regime and exacerbated Future growth would, however, require

protectionist pressures. Hligher protection, in increased inivestments, in particular in export

turn, added to the discrimination a.ainst exports activities, that may be encouraged by appro-inilerent in the overvaluation of the exchange priate incentives. Additional incentives rnayrate. also be granted to new activities, preferably in

Recommendations have been made in the form of subsidies rather than protection sothis paper for remedying macroeconomic as to promote production for domestic as well

disequilibria, reducing price distortions, and as for foreign markets.

NOTEIS

1. Dalta fur Kurca reter to 1963 -1970. tliose for able error as tlie deflator for all industria] exports.Taiwan tu 1961 1971, anid thuse for Mexico tu 1960 includin!e tOle above comiolodities, lIas becn apliplied to

1970. Tlhey- originate rouin tlie liles of a researeli tle narrowergroup.trOject 011 tie soUttres f et)conoulnie growth directed by

llollis B. Clieniery, Sherniiani Robinsun, and Moise 4. Tiese conclusioiis are confirnied bv the restlts of

Sy,r luin at tihe World Bank. an ecuinoejictriu study by Javier Salas (1982). At tlOesanie tiuiie Sal,as interprets tlie upsurge of inipuorts in

2. Inicreases in duinestie deiiiind aund elianges in input 1978 -1979 tu liíave bcen cauised by iínport liberaliza-

outtput cueflicients provide additiounatl uOntribution.s tiOn neglectin- tihc spillover effects of expansionary

t) industlia l1 ruwtIl. policies.

3. .M¿anlufaLetiurde.\ports laveobecidelinedtoe.u\lude 5. 1Ior a detailed diseiussioii. see Balassa, 1977, pr.food. beverages. aud tolbaeo. petroleuní derivNtives. 44 -46.und atrueheiicals. 'leresulís are sulject to consider-

TRAI) POLICY1 IN MI'FXICC) 811

Rl T'.RI`NCEI`S

Balassa. Bela, 'La politica coomercial de Mexico: Balassa. Bela. 'Outvward orientation aid excliaiilge rateanalisis y proposiciones', com?zercio Ekterior policv in developing councritlies: tlie Tuirkisi(Noveniber 1970). pIp. 922 -930. Repirinited in e.xperieice'. Mficldle l'ast Journal (SuiSiiiler 1983.1.Miguel Wionczek (ed.). La sociedad tmiexyicanza.' Su Balassa, Belu 'Ref'oriilng tlie nmeweconomici¡eclihanismpresenite ' fJutuiiro (Mexico, D.F.: Editoriat l lRA, in lunar', Joaurnlal oJ' Comiiparatii'e E'conomiCs1971), pp. 33 35 uncd in Leopoldo Solis (ed.), La (Juine 1983b).economia m'e.xicana 1. Analisis por sectores y Biuieno, Gerardo l.. 'The structure of prolection mídistribuciíón (Mexico, D.l.: Fondo de Cultura Me.\ico', in E3ela Balassa and Associates. TlIel:conóimica, 1973), pp. 416- 438. Structture of lProtectioz i¡n Dceielopin,g Co(ivutries

Balassa, Bela, 'Ioreign trace aníd inedustrial policy in (Bultiuíore, .\d.: Jolins 1lopkins University, Press,Mexico'. in Bela Balassa. Po1lcy Rej(/ru il Derelop- 1971). pp. 169-202; Spanish transIation ining Coountries (Oxsorcí: Pergamon Press. 1977). Estructura de la Proteccion¡t ill aises eni Desarrollopp. 31 -55. (Mexico D).1.: CIM M.A, 1972).

Balassa, Bela, 'Fxport incentives andí export per- Bueno. Gerardo M., 'l.a paridad elel poder adquisitivolormance in developing couintries: a comiiparative y las elasticidades de imiportación y exportación enanalysis', li"eltwirtsclhaJtlichzes Alrchiv (1978), 1p1)p México', El Trimestre Económico (April Juine24 61. Slpanishi trarns1ationl in Politicas de 1974). pp. 313 -325.Promnócion de lb:v*portaci(5ónes (Santiago: United Chenery. 1lollis B., 'liiteruction. bectcen industrializa-Nations I`conomuie ('ommission for Latin umerica. tion ancí e.\ports'. A mencan lEconomic Rc'ievv,Vol. 111, 1978). pp. 3 54. `ap)ers anti l'íroceedinzgs (May 198(J). pp. 281 292.

Balilssa. Bela, paper presented at tlhe Instituto Mexicano llerniáainei,. lilctor Cervantes. 'La politíca de collierciode ('omercio Ix\terior in Mexico, 1).1:. in Januuary exterior de Mexico', El Economzista Afexicano1980 and at tIhe NB1l3 lINF1 3,'BI'.13R Conference (Juiy - Aulust 1981), pp. 36--49.u1 'Trade Prospects among tie Amiericas: La tin Kate. Atriaau tei and Robert Broce WS'allace,Pro-tectionlAimerican-i Lxport I \xpansion und D)iversifieation' in and EconzomiiicDec,elopmZzeznl inl MVexico (Rotterdam:Sao Paolo, Brauiil in March 1980. lublishled in ('entre lor D)evelopiment Planning--. 1980); SpanishQua-rterlv Reviemt of Economnics and Buisiness trunslutioi in j Qa politica c/e proteccion eni el(Sulmilier 1981). pp. 131- 164 aund in WVerncr B1aer desarrollo Ceconómica dle 11e.vico (Me\ico. i).iaund MalColmi Gillis (edcs.). Export L iccersitication 1979).anzd tlhe NVevt P'rotectioinism7i: Tlie b:xperieniee of Orti¡. Antonio .Mle na. 'I)esaurrollo esta bilmiador: unal.atin Amnerica (Chumpai II. 111.: National BureaLc década cíe estrutegiu económica .n México'. inof 17conomic Reseurch unad thie University of :l-lexico, El7 Alarcado de l'alores (tNovenmber 1 969),Illinois, 1981),pp. 131 164. Portuguese translation No. 44.in Estudos fEcoomlioicos (April -Juicne 1981), PP. Ruiiz. Pablo Napoles. 'Iu lpolitica de comerciu e\terior11 -50. Republished Us Imv 3 in Belia Bulassa, de NMexico', Conicreio Ex.terior (Octoher 1981).The Nen'\lu,-Jndstniali:ing Coutitrics ¡o t/ie WI'orld pp. 11 73 - 11 78.EconoImv (Ne\w York: llergamiion l>ress. 1981). Solis. L.cpoldo. Economnie P'olicv RejOrm»u ¡ti M1+exico,pp. 8 3 1 00. A Case Stud(l forDel elopiing Couintries (New York:

Balussa. Belat, 'Tracle in manuibacturecd goocls: patterms l'ertunion Press. 1981).of change'. 4World D)evelopmenl (March 1981), Salas-. avier. 'lsitimation ofthle structure andcí elsticitiespp. 2 6 3 -275. of Mexican iniports in tlie period 1961 1979',

Balassa, Bela, 'Structural adjucstment policies in Jolurnal of' De'elopmnent Economnies (J uhe 1 982).developing ect)lonimies'. Wt'orild Derelopment pp. 297 311.(Januury 1982). pp. 23 - 38.

No. 269. James R. Follairt, Jr., Gíll-Chin Lim, and Bertrand Renaud, "HousingCrowding in Developing Countries and Willingness to Pay forAdditional Space: The Case of Korea," Journal of Development Economics

No. 270. Bela Balassa, "Policy Responses to External Shocks in Sub-SaharanAfrican Countries," Journa,l of Policy Modeling

No. 271. Jaime de Melo and Sherman Robinson, "Trade Adjustment Policiesand Income Distribution in Three Archetype Developing Economies,"Joturnal of Development Economics

No. 272. J. B. Knight and R. H. Sabot, "The Role of the Firm in WageDetermination: An African Case Study," Oxford Economic Papers

No. 273. William G. Tyler, "The Anti-Export Bias in Commercial Policies andExport Performance: Some Evidence from Recent Brazilian Experi-ence," Weltwirtschaftliches Archiv

No. 274. Ron Duncan and Ernst Lutz, "Penetration of Industrial CountryMarkets by Agricultural Products from Developing Countries," WorldDevelopmvent

No. 275. Malcolm D. Bale, "Food Prospects in the Developing Countries: AQualified Optimistic View," The American Economic Review (withRonald C. Duncan) and "World Agricultural Trade and Food Security:Emerging Patt.'Žrns and Policy Directions," Wisconsin International LawJournal (with V. Roy Southworth)

No. 276. Sweder van Wijnbergen, "Interest Rate Management in LDCs,"fournal of Monetary Economics

No. 277. Oli Havrylyshyn and Iradj Alikhani, "Is There Cause for ExportOptimism? An Inquiry into the Existence of a Second Generation ofSuccessful Exporters," Weltwirtschaftliches Archiv

No. 278. Olí Havrylyshyn and Martin Wolf, "Recent Trends in Trade amongDeveloping Countries," European Economic Review

No. 279. Nancy Birdsall, "Fertility arnd Economic Change in Eighteenth andNineteenth Century Europe: A Comment," Population and DevelopmentReview

No. 280. Walter Schaefer-Kehnert and John D. Von Pischke, "AgriculturalCredit Policy in Developing Countries," translated from Handbuch derLandwirtschaft und Ernahrung in den Entwicklungslandern (includesoriginal German text)

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